Which is better; investing in real estate with debt or equity?
Is it better to invest in properties with all cash, to use as much mortgage financing as you can, or to loan your money to investors with a debt investment? This is frequently a hotly debated question. On one side, you have the Dave Ramsey fans who shun virtually any type of lending or borrowing. Then you have the polar opposite real estate gurus recommending extreme leverage, and never using a dollar of your own. So, which strategy is best? How do they stack up against each other?
Take a look at some of the pros and cons of equity vs. debt investing, and you decide…
The Pros & Cons of Debt Investing
Investing with debt can either mean using debt and borrowing to fund investments. Or it can mean using your capital to make loans and provide debt financing to others.
Loaning your money for a return is a popular strategy with banks and venture capital firms, as well as affluent private lenders. On the upside, it can mean less management and overhead. You don’t own the property, so you normally don’t expect to pay taxes or insurance, or have to worry about repairs or tenants. That is unless the borrower stops paying. The downside is that you are only getting a percentage of the cash flow and return potential, and usually don’t get any share in rising equity.
Others don’t have a ton of cash, and may be considering borrowing money to fund investments with debt. This can be through mortgages, lines of credit, loans from retirement accounts, or pooling together money from friends and family. There are great advantages in this, including lowering your risk in any one investment, while being able to diversify and grow your investments fast. It can also bring extra risk from lender fraud, and ending up underwater if property values take a temporary nose dive. While many would prefer not to borrow, it can seem like a necessity for many who need a way to get ahead, and who just can’t save fast enough.
The Pros & Cons of Equity Investing
Equity investing can have its advantages and disadvantages too. First and foremost, it has traditionally meant limiting the ability to invest and diversify. Most people can’t save $180,000 a year to buy an average home all cash to turn into a rental. Putting your entire nest egg into just one property can be risky. One major hurricane or earthquake, and you could have a nightmare situation on your hands.
On the bright side, equity investing is often seen as less risky because you don’t owe the bank anything. You don’t have to worry about monthly mortgage payments, or banks faking foreclosure documents, or fraud like force placed insurance. You’ll also have more flexibility and liquidity if you ever need to sell.
Plus, equity investors can enjoy superior net returns as they avoid all those bank and borrowing fees, extra closing costs, and interest.
As we can see; there are benefits of both types of investing. However, there are also hybrid options. For example; you could team up with your friends and family to invest equity into an opportunity. It’s not all your cash, but you don’t have to worry about a bank loan. Or you could partner up with peers like you and invest a small amount of cash into a small pool of rental properties. This again gives you equity advantages, but retaining the ability to break through the traditional limits and risks of going it all alone.
How will you invest?
The sizzling hot summer rental market is kicking in. How can rental property owners be ready for it?
Summer is traditionally the busiest time of the year in the real estate industry. The rental market can be flooded with renters who are motivated to secure new places before school starts again. This makes it a busy time for landlords, with a lot of additional competition. How can rental property owners get prepared and make the most of it?
The first step is to do some fresh market research. Do your homework on the market. What is your competition offering? What deals are being offered to potential renters out there? What are market trends? Is it a landlord or tenants’ market?
You can’t expect to capture your share of renter leads unless they can see you. Be ramping up advertising, and reaching out to your connections and referral network to be sure they know you have units available.
Provide the Right Info
In your ads and rental listings make sure you provide enough detail for prospective tenants to make the decision to take action. This can include photos, video, property information, leasing details, and more. At this time of the year, many are specifically concerned with school districts, and the ability to move in fast.
Offer Attractive Deals
Know what your competition is offering, so you can make sure you are offering competitive deals. Make sure the value is there. Know what is going to connect with tenants in terms of deposit, monthly rent, application process, and move-in money requirements.
By this point, you should already have scaled up your infrastructure to handle the surge in business and communications. You’ve got to be able to respond to inquiries instantly and deliver consistently good service. Be sure to have a good team and systems in place to make this happen.
Don’t Neglect Current Tenants
All of the above is in addition to keeping your current tenants happy. With all the moving activity and the potential for attractive incentives being offered by other landlords and apartment owners, you want to take stock of your own inventory. Approach tenants early and find out if they plan to renew. Get those leases signed. Find out what you can do to keep good tenants. Or at least be aware of upcoming vacancies so that you can get marketing units early.
The best investments have traditionally been reserved only for accredited investors. How do you get ahead, and get into profitable real estate investments if you are a non-accredited investor?
For far too long the most appealing investments have been closely guarded and preserved for only already wealthy investors. That has been one of the key factors in the rich getting richer, while the poor get poorer. This divide is often the line in the sand between accredited investors, and those who are not. Newer rules may have opened a small window of opportunity for regular individuals. How can you take advantage of that?
Accredited Investor Status
The Securities and Exchange Commission (SEC) lays out the rules for qualifying as an accredited investor. In addition to big institutional investors like banks and pension funds, this also applies to individuals. To qualify you generally need to have a net worth of at least $1M. Or you need to be earning $200,000 per year, or $300,000 between you and your spouse.
This requirement has long been used to separate who can invest in what. The public argument is that these restrictions ‘protect’ consumers. Yet, they also prevent individuals from many investments, and control who can offer investments. The result has often been ensuring only the big old finance companies can control the flow of money, and only their best clients with the most money get access to the best deals.
The JOBS Act & Crowdfunding
Things began to change with the JOBS Act. This new law was introduced as a solution to breaking down the barriers and allowing more people to start businesses and offer opportunities while giving regular people to invest in a broader and better range of choices.
Unfortunately, most crowdfunding platforms and companies with these opportunities have not actually begun accepting non-accredited investors. Why? Because the legal expenses can be costly often times. Yet, structuring an offering and opening the doors to non-accredited investors, can mean a lot more up-front work for the crowdfunding platform. It also can afford the opportunity to a broader base of investors.
Options for Investing in Real Estate
Fortunately, there are some options for individuals who want to get into real estate investing and are eager to work their way up to accredited investor status.
Direct investment in properties all by yourself
REITs and funds
Select real estate crowdfunding portals
Without a lot of capital or experience of your own, and to avoid the high multiple layers of fees from old traditional brokers, it is normally best to leverage some expertise and partners to get best investments. This increases for upside potential and lowers your risk, by going into some form of private partnership or crowdfunding offer. Just make sure you understand what you are investing in, and ask lots of questions if you aren’t sure.
What should investors be looking for when evaluating real estate crowdfunding opportunities?
Real estate crowdfunding is quickly rising to be a go-to investment strategy for investors. There are a number of options out there on the web today. Some are good, others not so much. So, what should you be looking at when checking out your options?
Make sure it is a good fit. Different real estate crowdfunding platforms rely on different strategies and models. Look for the one which matches your desired strategy, is a match in terms of the amount of investment required, and shares your values. Are you looking to flip houses, hold for long term passive income, get into commercial properties, or invest in residential real estate? Are you willing and comfortable to bet $50,000 on a new investment partner, or does $5,000 seem like a smarter move?
There are some flashy looking websites out there, with appealing calls to action. Yet, some give very little detail about what your money will be invested in, and how. Others are far more transparent. Look at how much they are willing to share in general, how much they are sharing about how they do business, how your money is used, and other aspects. Those open to sharing tend to do far better over the long term than those operating who may be hiding aspects for other reasons.
They say the best indicator of future performance is past performance. So, how well has this platform performed in the past? What is the reputation of the owners and managers? See what data they share, but make sure you understand how it is calculated.
One of the best ways to choose or at least shortlist crowdfunding options is to get referrals. Ask around. Who have others had success with? Check out online reviews and see what others are saying about those you are considering. Ask the platform if they can provide references.
Do the numbers make sense? How much detail will they provide on their business, and the individual opportunities they are offering? What access will you have to the numbers after you invest? What type of reporting is offered to investors? You want as much access as possible, and not only to understand what you are investing in, but how sustainable the model is, and how profits are being collected and distributed.
Real estate crowdfunding has emerged as one of the most attractive investment options available today. Hone in on the best option by using the above factors to shortlist and perform your own due diligence, and then test the waters before scaling up your investments.
Does a house need to be vacant before you can close on a real estate deal?
There are many vacant homes across America today. However, some of the best house deals are those which still have people living in them. That could be the current owner who is in a distressed situation, or an existing tenant. Great deals can be negotiated on these properties. Yet, many new investors are not versed about this situation and how to handle it.
You can write a deal and go to contract on any property, regardless of what it is occupied or vacant. Your contract can specify whether it should be vacated before closing. Sometimes quirks do come up; such as squatters moving in, or sellers not finding somewhere else to move in time. In these cases you may be able to postpone and extend the closing date until the property is vacated.
If the property is leased, your local real estate laws may dictate that the lease survives the sale of the property. That means the new owner has to honor any existing lease. If you are buying an investment property this may be a great bonus. If the tenant is paying on time, then it saves you the time, risk, hassle, and money of going out to find a renter. Just make sure you verify their status, rents, lease term, etc. If the tenant isn’t paying, price in a discount for having to remove them, or ensure they will be evicted before you close.
Many distressed sellers will find it hard to move. It can be hard for them to rent or buy anything. Others may just find their own purchase transactions are delayed, and don’t have somewhere to move immediately. In these cases you can extend your closing date, or even leaseback the property to the previous owners. This is not uncommon, but it can be unpredictable. If they were not paying their mortgage, and the mortgage company was not able to have them evicted, then how are you going to do it?
If you need the property vacant, then it can be smart to help occupants move. Introduce them to a good real estate agent who will find them another home to buy or another rental. Or you may have an investment property they could rent. This is more desirable than leaving them in the existing property, as it breaks that emotional detachment and sense of ownership they may have. Get them into something they can afford to keep.
When buying a rental investment property, it can work well when a home is already tenant occupied. If there is a non-performing tenant, price that in or plan to have them out prior to purchase. If you are buying as a new residence, or to flip with major rehab needs, or you need a higher paying tenant – then have it vacated before closing. You have the right and it is good practice to walk-through the property within 24 hours of your closing. In conclusion it is also good to know the market and how quickly you are able to turn the property and have a new tenant in place. Keeping this in mind and being educated on the process of eviction should help you buy the right properties and not be afraid of purchasing rentals with tenants in place.
Making a smart real estate purchase is all about “location, location, location.” So, what should buyers be looking for in an area?
Whether you are buying a home or a rental property, you want to buy somewhere that your property value isn’t going to go down. No matter what you are buying, and why, it is an investment. When you invest you don’t want to lose money. So, it is important to look for an area which offers good growth potential.
Some of the factors that may indicate good growth potential include:
Strong local economy
Crime can directly impact real estate. It can impact income property performance, demand, and values. Crime ridden neighborhoods may represent areas which see rents and property prices decreasing, as well as more difficult property management challenges. However, it is important for investors to look at the direction of crime rate trends, the type of crime, the causes of statistical changes, and to apply common sense to the data. For example; direct property crime can be a big concern for property owners. Other types of crime may not be such a threat for owners. Crime can be cyclical too. Areas can be driven down by crime, and then rebound as serious crackdowns happen. Statistics can also be subjective due to various reporting and enforcement strategies.
Remodeling and Building Activity
Local renovation and new building activity is a great sign. It means others are investing heavily in an area. They are bringing in new cash and equity. In most cases this activity will also force up rental rates and property prices. It can also make an area more attractive to new residents and visitors. It is wise to not always be afraid of boarded up homes or homes that are in renovation process….this can mean that investors are working in this area and it is on the upswing. Local building permit activities can give clues to future activity like this as well.
Being aware of city plans will allow you to best position yourself in areas that are experiencing revitalization. It will allow for you to get properties cheaper and get the upside. Buying in revitalizing neighborhoods also gives you the opportunity to help your community. By rehabbing one house on the block it starts a trend and in no time, the block has more appeal. This gives the community a sense of hope that revitalization is coming. It also urges owner occupants to take a sense of pride in their individual homes. It encourages owners to upgrade their property in order to keep up with what’s going on in the neighborhood.
How do you determine the value of a property?
Determining the value of a property is a crucial part of buying, selling, and investing in property, so how is the best way to do this? How do you do it?
There are actually many factors to look at when estimating the value of a property. It is both an art and a science. Some, websites have tried boil this down to instant, automated valuation tools. Most of these don’t work very well, or accurately. Zillow is the most notorious example; with the company’s CEO selling his own home for 40% less than the Zestimate, or about $750,000 under the value his own platform provided. If you really want to know what a property is worth you have to dig deeper into the facts about the property, ensure you have the most up to date information, and even factor in why the property is being bought or sold.
The 3 Types of Valuation
There are three main ways of appraising real estate:
The cost approach
The income approach
The comparable sales approach
The cost approach calculates how much it would cost to rebuild a given property today. The income approach is typically used for investment property, and determines value based on the income the real estate can produce. The comparable sales approach is most commonly used for single family residential property, and determining a market value based on the sales of comparable properties.
Factors Considered in Determining Property Value
When it comes to assessing property value, the deeper and more detailed you are, the more accurate your estimates.
First and foremost is location then there are other important considerations to factor in·
Number of bedrooms
Number of bathrooms
Age of the property
Special features like swimming pools
Proximity to recently sold properties
Terms of a sale (i.e. financing used, seller contributions, repair credits, or Realtor rebates)
Where to Find the Data
There are a number of places to find the above data:
Real estate brokers
Clearly there is a lot that goes into determining the value of a property. Still, with as much as there is on the line when buying, selling, and investing in real estate, it is worth being detailed and achieving due diligence and clearly researching when assessing value of a property.
After the winter hibernation, the housing market is back in action. Most one-year leases are up, tax checks are in, and people are going to be looking for places to live. Now that you have prepared your property for spring, it’s time to get your team prepared. While you should have been preparing in late winter, it’s never to late to start to make sure your spring starts off right!
As the weather starts to warm up, especially in the Midwest, activity will increase. During the winter months, showings later in the day were pretty much obsolete because of the extreme temperatures. Being available will keep current tenants happy and will keep a steady stream of potential tenants coming in.
Incentives like $200 off first month’s rent, or discounts for signing a 2-year lease, are great ways to attract a crowd. Think about it, there are a ton of rental properties out there, so you have to figure out a way to stand out. What better way to do that than by offering something for a free or discounted price?
The last thing you want to do is watch homes rent while your sitting idle. If you have a home that recently became vacant, make sure you have a quick, but effective turnover. The opportunity for buying homes is also on the rise, so your acquisition team should be doing their do diligence to keep a pool of potential homes to buy.
Signs & Automatic Mailings
There are many ways your acquisitions team can prepare for the spring. Being more diligent about placing signs at your rental properties will increase your company’s visibility. Mailers are also a great way to get an owners attention. Stating that you’ll buy the home in cash and as is, is a great way to make deals happen quick.
Spring is the time to make sure your rental properties have the best curb appeal possible. Having a scheduled mowing list will make sure you don’t end up with a grass jungle in the front yard. It’s a time to check your basement for dampness that could lead to mold. Having a clear list for your maintenance team will all but ensure that your house are move in ready.
Now that you have your rental properties in great shape and your team clicking on all cylinders, you are ready to take on the spring and summer!
So you just invested or bought your first properties, or maybe you’re a seasoned veteran when it comes to real estate. If you’re new, maybe you don’t want to take on all the tasks that go along with managing a property. If you’re a veteran, maybe you don’t want be as involved anymore. In either case, a property management company (PMC) is a good solution. Picking a company to take care of your rental properties can be an exhausting task, but there are traits to look for in a property management company to make the process go as smoothly as possible.
Percentage they collect each month
Every PMC you go to is going to have a fee they collect every month for managing your properties. Duties like collecting rent, evicting troublesome tenants, etc. 8-12% is the typical fee. Any more then that and they will be taking a substantial chunk out of your bottom line.
Rental properties can accrue a number of expenses that can really add up over time. If you allow your PMC to take care of it then you want them to be as cost savvy as possible. If the towel rod breaks off in the bathroom, they should not look for the $75 rod if it’s a $30 bathroom.
Market Value Rent
Deciding what to charge for rent is one of the leading factors that affects your bottom line. Make sure your PMC chooses a market value rent. If the rental property is in an established neighborhood make sure the rent reflects that. The same can be said for a property in an up and coming neighborhood.
Without tenants, your rental property can drain your pockets. The PMC you choose has to work diligently to place new tenants in your property so your property doesn’t sit idle. Your PMC has to work fast, but not at the expense of quality. Placing quality tenants means the difference in having to replace carpet or simply having them cleaned.
Ease of communication with tenants
How your PMC communicates to your tenants can save or cost you a bunch of money. If the rent payment process isn’t easy, this can cause late rent payments. The ease of putting in a maintenance request can mean the difference between stopping a leak and having to replace a rotten floorboard. Your PMC should be available to you and your tenants at all times.
Reliability and Expertise
All of the traits mentioned above come with a proven track record. If you choose an established PMC, they will know more tricks of the trade.
Every house, owner, and tenant is different, so when considering a property management company take a look at all aspects and make the best decision for your rental property.
Foundation issues can be one of the scariest property flaws for many of those investing in real estate. What issues should be looked for when evaluating a property? Can these problems be fixed? When should you walk away?
Real Estate Investment and the Foundation Challenge
Foundation problems can be very serious. These are structural defects which can prevent financing. They can also get very expensive to tackle. They are often the result of grading problems, but not exclusively. In some parts of America foundation issues are quite commonplace, like in Texas. They may be rare in other states like Florida. Most investors and companies such as ours avoid at any sign of these types of problems. There can be unforeseen costs and financing challenges associated with these properties. At the same time this makes these properties a great opportunity for those ready to take it on. There can be less competition from other buyers, and that means potential for big discounts.
Grading & Foundation Issues to Look for in a Property
Some properties have obvious grading and structural issues. Some are easily spotted by uneven building lines. Walls, floors, ceilings, or the entire structure may be at odd angles. Previous inspection reports or appraisals may reveal the presence of these problems, even if they are not immediately visible in photos.
Other signs of potential problems may include wear and erosion around the exterior walls of the home, standing water, trees in close proximity to the dwelling, and interior leaks.
Uncorrected these issues can erode the foundation. Other foundation issues are a result of excessive pressure on the foundation and pressure load which causes stress on the foundational walls. You’ve got to be alert to these issues before making an offer, or price in the worst case scenario.
How to Handle Foundation and Grading Issues
The first thing to do is to get multiple inspections and quotes on fixing the issues. You want to know exactly what the problem is, how long it will take to remedy, and how much that will cost.
If current damage isn’t that bad foundations and grading can be fixed or supported. This may range from costing $500 to well over $30,0000. In some cases you may want to tear-down and rebuild. More affordable and minor remedies and preventative measures may include; improved grading, better gutters and drainage, tree and root removal, or installing new foundation piers and beams.
Foundation and grading issues can be very common in some real estate markets. This is something to be alert to, but which can also present great value opportunities. Know what to look for, who to ask for guidance, and when it makes sense to move forward or pass it up.